- Discussing recent agreement to sell the majority of the company's jackup fleet to ADES Group.
- Once the transaction has been consummated, Vantage Drilling's owned fleet will be down to just four rigs (two drillships and two jackups).
- Since the beginning of 2019, the company has used more than $300 million in cash from operating activities.
- Company faces a $350 million debt maturity in November 2023.
- While shares appear cheap from a NAV perspective, I am hesitant to assign a buy rating given major uncertainties regarding the company's future direction.
- Even in case management will be pursuing a sale, the size, composition and strategic positioning of the fleet are likely to limit potential bids.
Vantage Drilling International (OTCPK:VTDRF) or "Vantage" is a small, Houston-based provider of offshore contract drilling services. Like it has been the case with all junior offshore drillers, the multi-year industry downturn required the company to restructure its debt obligations in bankruptcy from which it emerged in early 2016.
As of the end of last year, the company owned a fleet of five jackup rigs and two ultra-deepwater drillships. In addition, Vantage is managing three rigs for Aquadrill LLC which most investors likely know under its previous name "Seadrill Partners" after it cut ties with former parent and sponsor Seadrill.
In 2019, Vantage received a $700 million arbitration award payment from Petrobras (PBR) for wrongful termination of a drilling contract in 2015 and subsequently distributed $525 million or approximately $40 per share to equityholders.
Adjusted for the award, the company has used more than $300 million in cash from operations over the past three years. At the end of 2021, Vantage's unrestricted cash balance was down to $73.3 million.
In addition, the company will have to address a $350 million debt maturity in November 2023.
With cash running low ahead of substantial debt maturities, the company recently agreed to divest three active jackup rigs (Emerald Driller, Sapphire Driller and Aquamarine Driller) to ADES Group ("ADES") for an aggregate $170 million. The price appears fairly low given the fact that two of the rigs just recently commenced new, multi-year contracts offshore Qatar.
As of December 31, 2021, the contract backlog associated with these rigs amounted to a whopping $190.8 million or almost 50% of the company's total backlog of $398.2 million.
That said, Vantage will receive from ADES certain amounts reimbursing it for the Qatari contract preparation and mobilization costs incurred prior to closing of the sale.
In addition, the company managed to enter into a three-year support services agreement with ADES for the divested rigs.
Moreover, ADES and Vantage announced to pursue a global strategic alliance leveraging the new support services agreement and the companies' existing ADVantage joint venture in Egypt. Pursuant to the agreement, the parties agreed to collaborate on exploring future commercial and operational opportunities.
Unfortunately, the indenture under the company's 9.25% First Lien Notes limits potential uses of the sales proceeds:
Under the First Lien Indenture, the Company may only use the proceeds from the ADES Sale to repay, prepay or purchase our senior secured indebtedness (including the 9.25% First Lien Notes), acquire all or substantially all of the assets or capital stock of any other entity engaged in a similar or complementary business to the Company’s lines of business, or make capital expenditures or acquire non-current assets (including vessels and related assets) that are useful in such lines of business (including any deposit or installment payments with respect thereto as well as any expenditures related to the acquisition, construction or “ready for sea” costs of such vessels). To the extent such proceeds are not so applied (or committed to be applied) within one year after receipt, the Company will be required to offer to purchase the 9.25% First Lien Notes with such proceeds.
In layman's terms: Vantage will either have to grow the business or offer to repurchase the First Lien Notes.
With just two jackup rigs and two drillships left and material debt coming due in late 2023, I just don't see how Vantage would be able to generate cash flow from operations, particularly given the fact that the fleet is operating in some of the least attractive regions of the world. For example, the ultra-deepwater drillship Platinum Explorer is currently working offshore India at an estimated day rate of just $150,000 while day rates in the Gulf of Mexico are approaching $400,000.
My current guesstimate for the value of the remaining fleet is around $400 million which would result in net asset value ("NAV") per share of slightly above $25:
Please note that Vantage is likely to continue burning cash from operations this year thus reducing net asset value over time (assuming stable rig valuations).
Quite frankly, I am having a hard time envisioning the company being acquired as a whole given the size, composition, and strategic positioning of the fleet.
While the remaining jackup rigs might be sold to ADES or other companies in the Middle East bracing for Saudi Arabia's anticipated jackup fleet expansion, selling the drillships might be more difficult. While the Tungsten Explorer has recently been upgraded with a managed pressure drilling ("MPD") system, both units are only equipped to drill in 10,000 feet of water despite the rigs having been designed for water depths up to 12,000 feet. With the positioning in India and the Mediterranean, buyers are unlikely to line up in droves.
Reducing the fleet value to $300 million would result in net asset value per share decreasing to approximately $17.50.
While shares appear cheap from a NAV-perspective, I am hesitant to assign a buy-rating given major uncertainties regarding the company's future direction. Even in case management will be pursuing a sale, the size, composition and strategic positioning of the fleet are likely to limit potential bids.
With shares currently trading on the Pink Sheets, liquidity remains an additional concern.
Given these issues, investors should abstain from chasing Vantage Drilling's shares and rather consider investing in major exchange-listed competitors like Noble Corporation (NE), Diamond Offshore (DO), Valaris (VAL) and Seadrill (expected to relist on the NYSE soon).
This article was written by
I am mostly a trader engaging in both long and short bets intraday and occasionally over the short- to medium term. My historical focus has been mostly on tech stocks but over the past couple of years I have also started broad coverage of the offshore drilling and supply industry as well as the shipping industry in general (tankers, containers, drybulk). In addition, I am having a close eye on the still nascent fuel cell industry.
I am located in Germany and have worked quite some time as an auditor for PricewaterhouseCoopers before becoming a daytrader almost 20 years ago. During this time, I managed to successfully maneuver the burst of the dotcom bubble and the aftermath of the world trade center attacks as well as the subprime crisis.
Despite not being a native speaker, I always try to deliver high quality research to followers and the entire Seeking Alpha community.
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